Giles v. Blunt, Ellis & Loewi, Inc., 86-2468

• Decision Date: 29 March 1988
• Docket Number: No. 86-2468,86-2468
• Citation: Giles v. Blunt, Ellis & Loewi, Inc., 845 F.2d 131 (7th Cir. 1988)
• Parties: Fed. Sec. L. Rep. P 93,689 Juanita M. GILES, Plaintiff-Appellee, v. BLUNT, ELLIS & LOEWI, INC., a corporation and Roger N. Kreuzer, Defendants-Appellants.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 131

845 F.2d 131

Fed. Sec. L. Rep. P 93,689

Juanita M. GILES, Plaintiff-Appellee, v. BLUNT, ELLIS & LOEWI, INC., a corporation and Roger N Kreuzer, Defendants-Appellants.

No. 86-2468.

United States Court of Appeals Seventh Circuit.

Argued Jan. 11, 1988.

Decided March 23, 1988.

As Amended March 29, 1988.

Thomas P. Ward, Thomas P. Ward, Ltd., Chicago, Ill., for defendants-appellants.

Jan H. Ohlander, Reno, Zahm, Folgate, Lindberg & Powell, Rockford, Ill., for plaintiff-appellee.

Before WOOD, POSNER, KANNE, Circuit Judges.

KANNE, Circuit Judge.

Blunt, Ellis & Loewi, Inc., a securities firm, and Roger Kreuzer, a broker (sometimes collectively "the brokers") have asked us to review an order by the district judge, staying arbitration of claims based on state law until a federal securities violation claim retained by the district court can be resolved. Both the state and federal claims are contained in the complaint filed in district court by Juanita M. Giles. We agree with the district court's determination that Mrs. Giles' federal securities violation claim is not subject to arbitration in this instance; however, we determine that the imposition of the stay of arbitration of the state contract and fraud claims was improper under a recent Supreme Court decision.

In early 1981, following her husband's death, Juanita Giles sought to invest a large sum of money. To that end, she opened both a margin and option account with Blunt, Ellis & Loewi, Inc., at its Springfield, Illinois, office. Appellant, Roger Kreuzer, handled Giles' account and agreed to invest Giles' funds in such a manner that the principal would remain protected.

At the time Mrs. Giles opened her accounts, she was asked to sign a General Account Agreement and an Option Account Agreement. Both agreements contained an arbitration clause which read as follows:

ARBITRATION:

If any controversy arises between us in connection with my accounts it may be settled by arbitration.... I understand that my entering this agreement bars me from pursuing any claims not arising under the federal securities laws in court, but does not bar me from pursuing such claims based solely on alleged violations of the federal securities laws in a judicial forum rather than in arbitration.

(p 16 General Account Agreement, p 12 Option Account Agreement) (emphasis added).

In May, 1985, Mrs. Giles filed a complaint against the brokerage firm and Kreuzer alleging that they deceived her and caused her to purchase speculative securities. In addition, she asserted that the brokers engaged in substantial option and margin account trading without her consent.

Eventually, after some procedural maneuvering and a dismissal of her complaint for failure to plead fraud with sufficient specificity, Mrs. Giles filed an amended complaint. That complaint, based on the same factual allegations as the original complaint, charged defendants with violating Sec. 10(b) of the 1934 Securities Exchange Act (15 U.S.C. Sec. 78j(b)), with making material misrepresentations in breach of an oral contract, and with fraud.

The brokers requested that Mrs. Giles submit her claims to arbitration under the terms of the Option and General Agreements. Mrs. Giles refused, contending her claims did not fall within the parameters of the arbitration clause. The brokers then sought to compel arbitration by filing a motion in the district court under Sec. 3 of the Federal Arbitration Act. 9 U.S.C. Sec. 1 et seq.

The district court, relying on a case it had previously decided, Preston v. Kruezer and Blunt, Ellis & Loewi, Inc., 641 F.Supp. 1163 (N.D.Ill.1986), ruled that Sec. 10(b) securities claims are never subject to mandatory arbitration clauses. Moreover, the court held that Mrs. Giles' federal claim was not arbitrable because the contract specifically excluded federal securities claims from arbitration. However, the court ruled that Mrs. Giles' remaining claims, based on state tort law, were arbitrable. The district court then considered whether to stay arbitration of the state claims pending a resolution of the federal claim. Expressing concern that an arbitration decision could collaterally estop a federal court from considering the federal claim in toto, the district court stayed the arbitration of the state claims.

The brokers appeal both the ruling that Mrs. Giles' federal securities claim was not arbitrable and the order staying arbitration of the state law claims. The brokers contend the Supreme Court, in Shearson/American Express v. McMahon, --- U.S. ----, 107 S.Ct. 2332, 96 L.Ed.2d 185 (1987), ruled that Sec. 10(b) claims are not exempt from mandatory arbitration clauses. Thus, they assert that the district court's decision in Preston has been overruled and its reliance on Preston in this case was in error. The brokers also maintain that another Supreme Court decision, Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 105 S.Ct. 1238, 84 L.Ed.2d 158 (1985), has laid to rest the notion that arbitration of state claims must be stayed pending judicial resolution of any federal securities claims.

In Shearson/American Express, a majority of the Supreme Court held that its previous decision in Wilko v. Swan, 346 U.S. 427, 74 S.Ct. 182, 98 L.Ed. 168 (1953), prohibiting compulsory arbitration of claims arising under Sec. 12(2) of the Securities Act of 1933, would not be extended to Sec. 10(b) and Rule 10b-5 claims. The Court found that an arbitration proceeding could provide an adequate means of enforcing Sec. 10(b) and Rule 10b-5. Thus, no inherent danger existed in permitting those claims to proceed to arbitration. Given the strong "federal policy favoring arbitration," Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1, 24, 103 S.Ct. 927, 944, 74 L.Ed.2d 765 (1983), district courts were compelled to enforce contractual provisions requiring arbitration of Sec. 10(b) securities claims.

The decision in Shearson/American Express contradicts the district court's earlier holding in Preston v. Blunt, Ellis & Loewi. Of course, the district court did not have the benefit of the Shearson decision when it ruled in Preston and when it subsequently relied on Preston in this case. It is clear now, however, that the district court's conclusion that Mrs. Giles' Sec. 10(b) claims can never be the subject of mandatory arbitration is wrong.

Nevertheless, the district court's ultimate decision that Mrs. Giles' federal claim was not subject to arbitration in this case was correct--but for the other reason given. Under the terms of the contract, Mrs. Giles was not required to arbitrate any "claims based solely on alleged violations of the federal securities laws." Nevertheless, the brokers argue that only if Mrs. Giles' entire complaint is based solely on federal securities laws, will she be free from mandatory arbitration. Thus, it is claimed that since Mrs. Giles charged the brokers with state law fraud and breach of an oral agreement, as well as a violation of the federal securities laws, she must arbitrate all her claims. Mrs. Giles, on the other hand, maintains that her federal securities claim is separable from her state claims and that, under the express terms of the agreements she signed, she is not required to arbitrate the federal claim.

We agree with Mrs. Giles. The arbitration clause states that Mrs. Giles is barred from "pursuing any claims not arising under the federal securities laws in court, but does not bar [her] from pursuing such claims based solely on alleged violations...